Covanta ended 2018 on a triumphant note, generating $457 million of adjusted EBITDA and $100 million of free cash flow for the year.
"From a performance perspective, what a year," declared President and CEO Steve Jones during the company's fourth quarter earnings call. "We processed more waste, generated more energy and recovered more metals than we have in any other year in the history of the company."
The record 20.4 million tons processed in 2018, according to Jones, reflect a full year of doubled operations, the addition of two large Palm Beach plants, and processing records at six different facilities — the demonstrated success of which will continue to yield even higher throughput into 2019.
- Following its financial close in December of the Scotland-based Earls Gate Energy Center, Covanta is continuing its expansion in the UK market with its Biffa-partnered Protos and Newhurst projects, both of which are expected to reach financial close in 2019. An ongoing court appeal over the environmental permit of the company's Rookery project in England won't impact construction financing, according to Jones.
- "I'd say there's probably a five-year to ten-year window in the UK where there's going to be more energy from waste projects," said Jones. "So we'll get these four rolling and then there's some other earlier development phase projects that we'll bring forward."
- While its focus over the next several years will be on the UK, Covanta is also branching out into other foreign markets. The company was recently awarded a WTE facility in the Philippines in partnership with Macquarie and has a number of prospective projects in Southeast Asia and South America.
"I think international business developments are important to our growth story," said Jones — a nod to Covanta's increasingly pronounced pivot toward overseas markets. As the company continues working toward its $250 million free cash flow goal, executives see foreign expansion as a critical component.
Part of the company's goal, according to CFO Brad Helgeson, is to "get more projects in the development pipeline and then kind of have a steady growth of new plants coming on." While Covanta currently has $10 million budgeted in 2019 for UK development, the company expects that figure to increase.
"Because we're the largest or the biggest energy-from-waste company in the world, and focus just on energy-from-waste, we get invited to participate in a number of projects," said Helgeson. "Some of them are further along in development, and we kind of jump on the train as it's moving somewhere earlier in development. But we're going to look a little more closely now at filling that pipeline so that we have a steady-state of growth of new energy-from-waste plants as time goes on."
Maximizing Existing Assets
In addition to expanding its global presence, Covanta is prioritizing its existing (and primarily domestic) assets as an equal or greater piece of achieving that $250 million free cash flow target.
- 2018 saw Covanta extending three service fee contracts totaling 1.1 million tons for an average duration of five years. The company is currently renegotiating expiring contracts at two plants, with no further expirations slated until 2023.
- Same-store tip fee prices were up 3.5% in 2018. With disposal options in many markets decreasing and transportation costs on the rise, Jones anticipates pricing increase opportunities in plants proximate to population centers. "We expect similar pricing performance in 2019 and believe that there are substantial runways to continue to push pricing," he said.
- Revenue from Covanta Environmental Solutions grew another 10% in 2018 — driven in part by a 26% increase in unregulated medical waste. The company expects its third permitted regulated medical waste plant to take on even more in 2019 and plans to expand capacity by permitting additional plants in the next several years.
- 2018 was "the safest year in the history of the company," according to Jones — WTE plants saw a 31% reduction in incidents YoY, while the company's total case incident rate reached a record low.
- While energy prices remain low, record energy production and modest improvements in market prices contributed to a "better-than-expected" year for energy revenue. Nearly 85% of Covanta's forecasted energy revenue is already contracted or hedged.
- Covanta continued advancing its metals processing capabilities in 2018, recovering over 470,000 tons of metal — a 9% increase over 2017.
- Covanta plans to invest $15 million in 2019 on its first Total Ash Processing System (TAPS) and approximately $25 million in total through 2020. Jones anticipates building at least four more TAPS facilities that can process ash on a regional basis in the coming years.
- Jones also acknowledged the possibility of future asset swaps with Wheelabrator (now under new ownership by Macquarie), indicating that discussions have already occurred. "There might be cases where they've got more operations in certain areas than we do, and they can make a facility more profitable than we can because of their existing operations," he noted. "So we can certainly look at that with them."
- For 2019 guidance, Covanta expects adjusted EBITDA to fall in the $440-$465 million range, with free cash flow of $120-$145 million.